New long-range missiles battering Ukraine and Russia. Vladimir Putin’s nuclear threats. Ballistics may cease in Lebanon, but continue in Gaza. Many worry a wider European war or Iran’s re-engagement threaten this bull market.
No. Markets have already proven they can shrug off these conflicts. My 2025 forecast is still cooking, but these wars aren’t reason to fear a bear market.
Let me explain. Bear markets form two ways: on top of the “wall of worry” in euphoria – when super-high expectations make markets susceptible to any material new negative – or when a new huge, multi-trillion dollar negative surprise wallops us.
Today’s regional wars are neither. They weigh on sentiment, keeping euphoria at bay – and aren’t wallops. They are horrendous. But they are no surprises.
Russia’s war with Ukraine is nearly three years old. Israel’s most recent salvo against Hamas started more than a year ago, with worries over it spreading to Lebanon and Iran bubbling the whole time.
There is nothing on either front stocks haven’t weighed. Markets dissected both … and continued clocking record highs. They priced the potential cost of it all and moved on.
War is a terrible human tragedy, always. Our society rightly hates and laments destroyed lives and property.
But stocks are unemotional – heartless. They simply fathom the economic cost. Will a conflict affect a large enough swath of the global economy to erase a few trillion dollars’ worth of gross domestic product? If not wallop-sized, the conflict isn’t bear market fuel.
There are – sadly – abundant examples. The Korean War. The six-day war of 1967. Iran-Iraq. The Bosnian war of the 1990s that erupted in Europe’s long-feared “powder keg”. Iraq in 1991 and 2003. Syria in the mid-2010s. Russia’s 2014 seizure of Ukraine’s Crimean territory.
All stoked fear. None triggered a bear market. Some drove volatility – usually before conflict started. But that typically passed when fighting began. Stocks hate the uncertainty mounting tensions bring more than regional conflict itself. Hence, the age-old market adage: “Sell on the fear; buy on the bullets.”
Historically, only world wars have swayed stocks materially. Early era inaccurate data suggest the First World War had a nasty bear market bite. Better S&P 500 and FTSE all-share data show the Second World War's outbreak in Europe caused a brutal bear market.
But these are the only two times war and war alone was a bear market’s proximate cause. And why? Because they hugely disrupted the global economy.
Perhaps 2022 looks like a counterpoint. Russian President Vladimir Putin invaded Ukraine that February, early in the January 3 to October 12 bear market. But fighting alone didn’t cause stocks to decline.
Rather, it was one of many fears stinging investors like a swarm of bees. There was the fear of sanctions, Covid’s lingering supply chain disruptions, central banks facing interest rate hikes and European energy shortage fears that pre-dated Ukraine fighting. All took turns stinging again and again, cycling in and out multiple times.
How do you know the swarm of morphing fears, and not the war itself, caused the bear market? Simple: The stocks told us.
There was no peace when the new bull market began that October 13. But stocks rallied through to the end of 2022, 2023 and now 2024. This happened even as both sides dug in, casualties mounted and cities were levelled.
The cold truth is that Ukraine is just 0.16 per cent of global GDP – nowhere near enough to render a recession in a global GDP of over $110 trillion.
Israel’s war with Hamas shows this, too. Here, stocks followed their normal pattern, wobbling in the run-up to fighting as uncertainty surged, then moving on as war broke out and its limited scope became clear.
We saw, quickly and clearly, fighting stayed local, confined to tiny slivers of world GDP. Natural gas supply disruptions were short. After a drop in the fourth quarter of 2023, Israel’s GDP rebounded. Markets rightly rallied.
Stocks move most on the gap between expectations and subsequent realities. Regional conflict lowers expectations, widening the gap – creating more bullish positive surprise as things don’t go as badly as many feared.
Twice this year, Israel traded fire with Iran, stoking fears of major, potentially global escalation. But fears proved false and stocks rallied promptly.
The Houthi militia’s attacks on Red Sea oil tankers roiled sentiment, sparking fear of 2022-style supply disruptions. But these too proved false.
Brent crude oil closed at $87.86 on October 6, 2023 – the day before Hamas’s attack on Israel triggered the war. It now sits at about $75, telling you everything you need to know. All this happened before November 26’s Lebanon ceasefire fuelled hopes of broader peace.
So, while this bull market isn’t risk-free, well-known regional conflicts aren’t a trigger for a bear market. Rather, they are bricks in the wall of worry and stocks normally climb until worries subside and euphoria reins. Stocks spent all year telling you this. Trust them.
